Using Economic Zones for Competitive Local Advantages:
Today many of my colleagues are following Einstein’s definition of insanity… they keep doing the same old things they learned prior to 2008 (the Great Global Financial Crisis) GFC and then when their results are lackluster or worse, they can’t comprehend why. It is simple, you have to get out of that old same old business mindset and understand that economic development as we knew it in the 20th century is dead in the operating room. To revive new business growth the leaders of communities and economic development organizations need to embrace progress and the art of Thrivival (Thriving and surviving simultaneously in a period of intense economic transition and transformation new strategies for financing business transactions, in particular those too large for the SBA and not large enough for public capital markets. This large portion of our economy has gone missing in the new era of financial institutional capitalization.
This target project is typically greater than $10M and less than $250M in size and can have a huge economic positive impact on the communities that work through the process of finalizing the capital structure for such transactions.
The one lost art of economic development is our old process of being responsible and accountable for all elements of the deal. Today many economic developers want the private sector to bring them opportunities that are pre-made and pre-packaged for success. It is no wonder they are all sitting around the room looking at each other with blank stares.
This approach is just not plausible for most communities. The best approach is to be proactive and create the deal structure and work through the details that will enable the project to get financed as I discuss in my other article, “the Art of the Deal Today.”
Putting together these types of transactions often involves thinking out of the box. That means there is no cookie cutter approach that will work. You have to create a custom set of tools to address the specific opportunity and needs of the private sector partner in the project.
By taking this approach not only do such economic developers separate themselves from the herd of mediocrity but they create a strategic competitive advantage for their community and/or region that is a compelling draw for private sector investment.
Often the politicians at the local, regional and state level are hesitant to embrace this approach because it does involve some shared risk. But if you do not risk something of tangible and measurable value the private sector will not take your pitch serious. You cannot have your proverbial cake and eat it to. So understanding how to put some economic skin in the game is crucial to success.
This leads me to my main point of this article. I have found that the creation of special economic zones through local ordinance, regional joint powers agreements and state special legislation can be just the right tool to accomplish the task.
By creating this site specific zone, we are not changing the over-all state, regional, or local tax implications that they so often cry about as it is portrayed to cut into their already over-burdened revenue stream. In addition, it does not really have a negative impact on their current budgets as it is after-all revenue neutral… meaning the zone is a greenfield site or in some cases a redevelopment or brownfield site and has little if any current economic contribution to their economic budgets.
Inside this zone is where the magic can occur. We get to be as creative as you can be and your true economic genius can shine. This is what will set you apart from your competitors and draw the private sector into more interesting dialogs with you about the opportunity to grow their businesses within your community and/or region.
These zones can be the absolute most powerful piece of economic artillery we have in our proverbial incentive strategy arsenals.
The Economic Zone concept can be used for all types of economic development transactions across a wide spectrum of industries, from manufacturing, logistics, life sciences, research, retail, mixed use and entertainment and destination tourism attraction.
The zone can be tweaked to include the right set of specific incentives that will extremely hard for the private sector to resist in each category. The one cautionary rule I normally suggest is that you are careful not to mix too many industries into your zone, especially those that do not co-exist well.
This Economic Zone now becomes the primary business development tool to drive new and engaging public private partnerships in your area. As a site location consultant I often ask communities and regions if I choose your area are you going to be willing to create this type of zone for my client? If they answer no, well you know how we react, that community gets a big fat RED X across it’s name and we move on to a more progressive minded community. Targeted economic incentives are a necessary component today in this post GFC economic climate. There is very large private sector awareness of risk and their avoidance of risk and loss of capital and preservation of existing cash flow is the king of their considerations. The ROI of their transactions are carefully measured and evaluated from a risk tolerance perspective. Knowing and understanding these investor requirement model business case expectations should be one of the primary discussion points in your first meeting with a private sector client today.
Once you understand where they are coming from and what return in equity, cash flow implications and risk tolerance they have in such considerations, you can then go to work in designing your custom response by using this economic zone approach.
Here are just a few of the strategies an Economic Zone can consider:
Real Property & Personal Tangible Property Tax Abatement
Tax Increment Financing (pay as you go with rebates annually)
Sales Tax Increment Financing Rebates (STIF)
Land Grants for fee simple title with permit fee forgiveness and shovel ready utilities
Financing Fee write downs on capitalization and professional fee reimbursements
On-site improvements and below ground infrastructure development
Signage is provided
Roads and other landscaping are provided for free or at a participated cost arrangement
Revolving Loan Fund Participation or Local Venture Capital for a portion of the financing
Due Diligence Expense reimbursement for market validation and feasibility
Investment Banking Fee is paid by the Public Sector
These are just a few of the types of incentives that the private sector will find highly valuable and if employed by the economic development organization they will find more than likely a very favorable response from the private sector.
In these circumstances again, i recommend a cautionary note. You must fully vet the project opportunity, the company and the executive management team and the equity and financial strength of such proposed considerations for your economic zone very carefully. The last thing you want to do is create an unrealistic expectation that is not based on market realities with an insolvent company and/or poorly managed project team or business case. It is crucial that the economic developer use the three-step engagement process to vet these considerations prior to committing their time, money and staff resources to what could become a huge waste of all of the above and a public affairs nightmare.
None the less, if this process is done correctly and the procedures followed as i have suggested they can and will produce highly positive and very strong economic development outcomes in most cases.
I wish you happy hunting.
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